Image source: Rolls-Royce Plc
For mature companies that have already been listed on the stock market for decades, Rolls-Royce (LSE:RR) There is a very rare stock price chart. Rolls-Royce stocks are rising sharply 51% So far this year. They’re now 692% higher Five years ago.
In recent years, the stock price of Rolls-Royce has appeared to be getting higher and higher. There was a bump along the way, but the momentum was strong.
So, maybe it would make sense to me to buy some today for my portfolio?
Look at the basics of the future, not the momentum of the past
First, you need to make it clear that you are not investing based on your share momentum. I consider it to be like passing through a parcel. When the music stops, your mood can change very quickly.
So my choice as to whether to buy Rolls-Royce shares in my portfolio is based not on what the stock price is doing, but on what the business’s commercial outlook looks like.
Abundance of continuous growth
In short, I think Rolls-Royce appears to be well positioned for its short to medium term future.
Civil aviation, defense and power generation all benefit from increased customer demand. Rolls-Royce’s business is spreading across the board, and the demand is high, leading to increased revenues. I hope that will be the case in both defense and power generation in the coming years.
Civil aviation engine sales and services could continue to grow, but in reality, whether or not it will happen depends on passenger demand. For example, it tends to drop dramatically from time to time due to recessions or events that reduce confidence in flight.
It may be difficult to justify the evaluation
The Rolls have set up an ambitious medium-term target, and so far they’ve attacked some of them earlier than their schedule and set them higher.
Therefore, current investment cases are intended to provide strong operations in sectors set up to continue growing. Despite this, I like it, but the Rolls-Royce sharing is now trading on what it seems to be actively valuing to me.
Price vs. return is 30. This is much higher than getting used to mature companies in a mature industry. I think this is a fair explanation of Roll.
This is why I don’t invest
One possible justification of that valuation is the potential for revenue growth. Given the strong customer demand and the company’s aggressive planning, that seems likely. Once that happens, you can push the Rolls-Royce share from here.
But what if that doesn’t happen?
That may be for internal reasons: Rolls is a complex company with extended project lead times that have been inconsistent for a long time when it comes to financial performance.
External factors may also throw a spanner into the work. The pandemic and related travel restrictions have led to Rolls-Royce on his knees and the stocks have fallen to sell for Penny. Another unexpected sudden economic recession in travel demand can always come out of the blue.
The rating is too high for my comfort, so I won’t invest.